Non-Compete Agreements

Non-Compete Agreements and the Virginia Duty of Employee Loyalty in an Increasingly Competitive Employment Market

In a competitive business and employment market, non-compete agreements are on the rise.1 A non-compete agreement is an agreement, or contract, between an employer and an employee that sets out certain provisions restricting the employee after they leave that business or company.2 These provisions restrict an employee from competing by controlling their ability to join a competitor for a certain time period after leaving their former employer.3 Non-solicitation agreements are usually a part of a non-compete agreement and they set provisions against soliciting business from the employee’s former employer’s customers or soliciting the former employer’s employees to join a competitor.4 This article will explore why these agreements matter, how to determine whether these agreements are enforceable, and the limits that Courts have imposed on non-compete agreements. Additionally, this article will explore the limits courts have placed on an employee’s competition with their employer in the absence of stricter contractual limitations.

I. Why Non-Compete Agreements Matter

Non-compete agreements matter and should be thoroughly understood by both parties when an employee is considering new employment at a company and when an employee is considering leaving a company. A business wants to protect its interests and survive in a competitive market and an employee wants to guarantee that they are getting a fair agreement.

Non-compete agreements are difficult to draft, difficult to enforce, and vary by case specific facts. 5In Virginia, there are no statutory provisions that govern non-compete contracts—the agreements are ruled under common law.6 Virginia is also unique in that it does not have a “blue-pencil rule.”7 A blue-pencil rule allows courts to modify and narrow the non-compete agreement in order to make the scope reasonable.8 This is important to note because if the non-compete agreement was not properly drafted and is too extensive, it is not enforceable in Virginia.9 Non-compete agreements are clearly complicated and it is important to understand the intricacies of the agreements.

II. Enforceability of Non-compete Agreements

Non-compete agreements are not favored in the state of Virginia, but they can be enforceable.10In order to determine whether a non-compete agreement is enforceable, courts will look at the following factors:

“Is the restraint, from the standpoint of the employer, reasonable in the sense that it is no greater than necessary to protect the employer in some legitimate business interest?

From the standpoint of the employee, is the restraint reasonable in the sense that it is not unduly harsh and oppressive in curtailing his legitimate efforts to earn a livelihood?

Is the restraint reasonable from the standpoint of a sound public policy?”11

Each case is fact specific, but Virginia courts focus “on the restriction in terms of function, geographic scope, and duration,” considered together, to analyze the three factors above.12

The first factor states that the restraint cannot be greater than necessary to protect the employer’s legitimate business interest.13 This means that there must be a purpose for the non-compete agreement that is not just protecting the business against competition.14 For example, the employee should have been exposed to trade secrets, confidential information, pricing information, or opportunities to develop personal relationships with clients in order for the employer to ask the employee to sign a non-compete agreement.15 To be narrowly drawn to just the legitimate business interest, Virginia law also states that this restriction is limited to “employment in an actually competing role.”16 In Simmons v. Miller, the restraint was not narrow enough.17 The employer, Las Palmas, imported one particular brand of cigars, grown and manufactured at a specific location.18Yet, the restrictive function in the non-compete agreement restricted the employee from “any business similar to the type of business conducted by” Las Palmas.19 This restrictive function was unnecessarily broad and not narrowly tailored to the employer’s legitimate business interest.

The second factor analyzes how unduly harsh or oppressive the restrictive provision in the non-compete article can be to the employee’s efforts to earn a livelihood.20 When a provision in the non-compete agreement is overly broad in terms of its geographic scope and duration, the non-compete agreement can be invalid.21 Virginia courts determine the fairness of the geographic scope provisions by determining the geographic reach of the agreement.22 Some decisions indicate that it is not reasonable for the reach to extend “into any area that is not coterminous [in the same space] with that of the business at the time of the agreement.”23 In Simmons, the employee was prohibited from engaging in any business importing cigars around the world.24 The employee also had a three year restriction limiting him from directly or indirectly, owning, managing, controlling, being employed by, participating in, or being connected in any manner with ownership, management, operation, or control of any business similar to the type of business conducted by Las Palmas.25Because of how broad the geographic scope and duration of the terms in this agreement were, the court determined the provisions to be unduly harsh.26 The restrictive terms would have thwarted the employee’s ability to find another job and earn his livelihood.

Finally, the restraint cannot go against public policy.27 What goes against public policy is not easily determined. Effective public policy promotes competition, but restrictions that are unnecessarily extensive have an adverse impact on competition.28 In Simmons the non-compete agreement went against public policy because of how unnecessarily restrictive it was in terms of its geographic scope and durational provisions.29 The terms of that non-compete agreement were greater than necessary to protect the legitimate interests of the business, Las Palmas.30 The restrictive terms were also unduly harsh to the employee and would have curtailed his efforts to find employment.31

III. Limits the Courts Can Impose On Restrictions

Since a non-compete agreement is a contract, the agreement requires legal conditions in order to make the contract valid and enforceable.32 One of these conditions is that the non-compete agreement must have consideration in order to be valid.33 Consideration is a promise made through a bargain-for-exchange.34 Each party benefits from the contractual agreement.35 Before signing a non-compete agreement, the employer must give the employee consideration.36 Usually, the employer agreeing to hire the employee is enough consideration.37 Problems arise when a non-compete agreement is presented to an employee who has already been working for the employer.38 What constitutes as consideration? Courts, and not only in Virginia, have lacked consistency in their decisions regarding this issue.39

In 2014, a number of court decisions across the states have changed the requirements for consideration in order to make a non-compete agreement valid.40Creech v. Brown is a significant case where the Kentucky Court decided that continued employment alone was not enough to justify consideration.41 In Creech, the employee, Mr. Brown, was employed for 18 years before he was given a non-compete agreement to sign.42 This agreement included non-solicitation provisions and confidentiality agreements.43 This agreement also stated that after leaving Creech, Mr. Brown could not work in another company that indirectly or directly competed with Creech without consent.44Mr. Brown was not offered anything in exchange for signing the agreement and there was no change in salary or responsibility after Mr. Brown signed the agreement.45 Mr. Brown left Creech 2 years later to take a job with a competitor.46 The Court stated that since “the Agreement did not alter the terms of the employment relationship between Creech and Brown and was not the same as new employment…Creech did not provide consideration to Brown by hiring or rehiring him based on his acceptance of the agreement.”47

IV. Virginia Employees’ Fiduciary Duty

In Virginia, restrictions on employees exist even without an agreement with your current or former employer. Under common law, an employee owes their employer a fiduciary duty of loyalty during their employment.48 This duty includes a specific duty for the employee not to compete with their employer during their employment.49 Plainly stated, an employee should always have their employer’s interest above their own; not acting in any manner that is adverse to their employer’s interest.50 There is certain conduct that would constitute a breach of fiduciary duty of loyalty which includes: an employee misappropriating trade secrets, misusing confidential information, or soliciting “an employer’s clients or other employees prior to termination of employment.”51

A Virginia case, Baker v. Field, provides a good example of how an employee can breach their duty of loyalty and the results of that breach.52 Mr. Field worked for a company, AutoMall, as the CEO and chairman of the board of directors.53 Mr. Field exercised total dominion over the business.54 Unfortunately, Mr. Field avoided meetings with shareholders, withheld information from the board of directors regarding the company’s affairs, and initiated a company program that promoted his own interests and helped him gain $500,000 in profits.55 Without any discussion with the board of directors, Mr. Field authorized a merge with another company.56 Mr. Field appointed company directors without AutoMall’s permission, misappropriated company funds, and wrongfully fired an employee.57 Mr. Field was sued for breach of fiduciary duty of loyalty to the company.58 By concealing his actions from the company and using the company’s assets for his financial gain, Mr. Field breached his fiduciary duty of loyalty and had to pay almost $1.5 million dollars in damages.59

In conclusion, the restrictions on employees’ ability to work outside of their primary employment are not clear. The law is steadily evolving in an attempt to keep up with the issues that arise from non-compete agreements. By understanding the components of these agreements and the restrictions that come with them, employees and employers can better prepare themselves when signing and drafting these agreements.

Endnotes

1Jessica Hullinger, What You Need to Know Before Signing a Noncompete Agreement, lifehacker, (June 2014), http://lifehacker.com/what-you-need-to-know-before-signing-a-noncompete-agree-1592786728.

18 See John B. Simpson, Preventing Competition as a Way to Compete: A Basic Primer on Non‐ Competition Employment Agreements in Virginia, Martin Wren, P.C. Attorneys at Law, available at http://www.martinwrenlaw.com/virginia-law-articles/noncompete.pdf